May 5, 1999
Federal Reserve Districts
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Economic activity increased moderately in the First District in recent months. Contacts in the retail and manufacturing sectors report single-digit sales increases from a year earlier. Price reports are more mixed than they have been in the recent past. While retailers face falling or stable vendor prices and are not raising their own prices, manufacturers report that previously declining input prices have stabilized and a few are raising their selling prices. Strong demand is propelling increases in activity in residential real estate markets in the region.
Employment at respondent firms is either holding steady or increasing slightly. Most retail contacts report that wages are continuing to grow at a 3 to 6 percent pace. One exception is the consumer appliances sector; wages are rising 5 to 10 percent annually in this sector because the labor market for more highly skilled sales help is exceptionally tight. All retail contacts say that competitive pressures continue to restrain retail prices, while international economic weakness continues to drive down vendor prices. Gross margins are reported to be either increasing slightly or holding steady.
Retailers report that capital expansion plans have not changed since the first of the year. Looking forward, most contacts say that they expect steady economic growth to continue for the next six months, but they also express great uncertainty about the outlook beyond six months. They state that the future strength of the economy depends upon continuing growth in equity prices along with stable interest rates.
Manufacturing and Related Services
Makers of consumer goods and component parts say that Asian demand for their products is increasing. However, most suppliers of heavy capital and construction-related equipment say their Asian sales remain sluggish.
Manufacturers report that various input costs that had been falling are now stabilizing or rising; the list includes aluminum, copper, silicon, oil-based products, chemicals, paper, and leather. Most other materials costs remain steady. Manufacturers' selling prices are little changed for the most part, and some equipment and machinery prices continue to fall as a result of customer pressures. By exception, a manufacturer of residential building materials and a food processing firm report price increases in the range of 3 to 5 percent because of higher input costs.
Most contacts have made very little adjustment in the size of their domestic workforce in the past year. However, companies have hired more employees for printing, publishing, and equipment servicing operations and plan to continue to do so. Expectations of improvement in the semiconductor industry and weakness in aircraft markets also are causing adjustments in production worker headcounts. Most manufacturers contacted are granting overall pay increases of 4 to 5 percent. Higher increases are reported for technically oriented personnel, while lower increases are the norm in situations where cost reduction is a top priority.
Only one-quarter of the contacts plan increases in capital spending this year. Most companies intend to reduce capital costs or to manage them more closely. Although some firms will build up inventories later this year, many indicate that cost concerns will temper their hedging against potential Y2K-related disruptions.
Most manufacturers expect their business to expand in coming months. However, they frequently mention risks or limits to growth, attributable in some cases to general economic factors and in other cases to industry-specific forces.
Residential Real Estate
Activity in the Greater Boston area and southern New Hampshire is very strong. The number of 1999 sales in Massachusetts is higher than in the same period last year, with a record number of condominium sales. Contacts say prices in the Boston area have appreciated by 10 to 15 percent from a year ago.
Southern Connecticut is also very strong and Fairfield County has reported a record number of sales this year. A contact in Hartford reports a small increase in sales of existing homes, but a significant increase in new construction. Prices in Hartford have risen modestly during the last year. Sales have also increased in Rhode Island, where the number of listings is 40 percent lower than a year ago, while prices have increased only moderately.
Demand is expected to stay high throughout New England. Shortages of supply, both of existing homes and of land for new construction, may lead to further price increases.